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Summary

Seed funds invest in companies at the earliest stages, meeting capital needs at a time when a company is perceived as too risky for bank financing and too small for venture capital. Learn about the components of successful seed capital funds and how incubators can be involved in their creation.

Growing seed funds: For-profit strategies, experienced managers, adequate deal flow (and no politics) make for successful public-private funds

by Justin Boyd

October 2002

Chip Cooper, executive director of Missouri Innovation Center, the University of Missouri-Columbia's technology commercialization office, became frustrated in the mid-1990s that companies spinning out of the university couldn't attract the seed investments they needed to grow. When Cooper looked around the state, he found virtually no sophisticated venture capital focused on early-stage start-ups. In fact, outside Missouri's two urban centers, St. Louis and Kansas City, seed capital was nonexistent. So Cooper began drumming up support for the creation of a statewide seed capital fund that would invest in early-stage start-ups in all parts of Missouri.

By 1998, Cooper and his coalition of technology transfer officials, venture capitalists, politicians, incubator managers and others had drafted legislation that passed as the New Enterprise Creation Act. The act authorized the creation of Prolog Ventures, a seed fund organized in 2001 as a private, limited liability company that would focus on making investments in early-stage companies around the state. The state authorized the fund's managers - professional venture capital investors rigorously evaluated and recruited by Prolog's organizers – to offer up to $20 million in tax credits to private investors who would receive a 50-cent state income tax credit for every dollar invested in the fund. By the time the fund stopped taking investments, it had spent $17 million of the tax credits and raised $34 million from sources including wealthy individuals, Alafi Capital, the Carpenters' Union Pension Trust Fund, the Danforth Foundation, Monsanto Company, Stifel Financial Corp., the University of Missouri, Washington University, and others.

Economic development professionals, including incubator managers, increasingly have the option of steering companies toward state and local seed funds for the early rounds of financing they need to develop their ideas and technologies. These pools of private and/or public capital are focused on investing in emerging companies at the earliest stages and can meet capital needs at a time when a company is perceived as too risky for standard bank financing and too small for traditional venture capital investment.

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Keywords: business financing, capital access, in-house loan and equity financing program, partnerships -- organizational/corporate

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